Case Studies

Concessional Contribution Cap reduced to $25,000

The concessional contribution cap is about to reduce from $30,000/$35,000 (for those under age 50/for those aged 50 and over) to $25,000 for all, irrespective of age.

We will consider two cases where an individual is potentially affected by this change.

*Max is 55 years old and employed as a General Manager for a Large IT company on a Fulltime basis earning $220,000 per annum. His current Superannuation Guarantee (SG) Payments at 9.5% are $20,900 per annum. Max is also Salary sacrificing a further 5% ($11,000) of his salary to his Super Fund to assist with growth as well as minimise his personal tax. Max’s Total Superannuation Contributions for the year are $31,900 (Net Super Contributions are $27,115).

On July 1, 2017, the Concessional Contribution Cap will reduce to $25,000 (regardless of age)

If Max were to continue as he is currently, he will exceed the $25,000 limit by $6,900. The excess contributions of $6,900 will be taxed at 47%.

Outcome for Max

In this example, Max is already on this highest marginal tax rate of 47% (Including Medicare). As such, he is not disadvantaged either way. If he reduces his salary sacrifice superannuation contributions, he will pay personal income tax at the rate of 47% or if he continues to fund Salary sacrifice Superannuation contributions in excess of the cap, he will also pay 47% on those amounts in excess of the cap.

*Bernard is 61 years old and employed as a store room manager on a full-time basis earning $87,000 per annum. His current Superannuation Guarantee entitlements amount to $8,075.00. He is using a Transition to Retirement strategy to help boost his Superannuation benefits for his eventual retirement at age 65. He currently salaries sacrifice superannuation contributions of $26,925 to bring his total contributions up to the Concessional Contribution Cap of $35,000.

Unlike Max, Following the change in the contribution cap rule on July 1, 2017, Bernard will have to reduce his salary sacrifice superannuation contributions. This is because he will pay 47% on all contributions in excess of the new $25,000 limit.

If he were to continue to salary sacrifice at his current level he will make contributions of $10,000 per year over the cap. This will incur a tax liability of $4,700. Had he taken these funds as personal income, he would pay personal income tax (32.5% + 2% Medicare) of $3,400.

Outcome for Bernard

Unlike Max where there is no real gain in reducing the amount over the cap of $25,000, Bernard will save $1,300 per year by reducing his contributions to meet the revised concessional contribution cap.

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